A blog about Non-profit Organization Management & Leadership

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The proliferation of non-profit organizations across the United States has been well documented for years. According to the National Center for Charitable Statistics at the Urban Institute, in the ten-year period from 1999 to 2009, the U.S. saw a 31.5 percent increase in the number of registered 501(c)3 public charities, totaling more than 1.5 million nationwide (2010). That percentage increase excludes foreign and government organizations. In my state of Pennsylvania alone, Non-Profit Stats reports a whopping 72,725 registered charitable organizations (2013).

The numbers are even more significant today because many non-profit organizations in communities throughout the country are often trying to carve out their existence in fierce competition with one another for stagnant pools of local monies as well as they are facing reduced if not eliminated private and public funding in a poor economy.

My recent introduction to a very worthwhile start-up non-profit in the Lehigh Valley, PA community reminded me of the rigors of starting a new non-profit organization. The following are just a few highlights of the many, many “hoops” through which a fledgling non-profit is required to jump:

Determine the need and sustainability. Before hanging a sign on the door and printing business cards, determine the need for a non-profit serving the proposed mission or purpose in the community. Are there other organizations already established in the local community that serve the same purpose, goals, population or issues? If so, there may not be a strong commitment to a “duplicate” organization starting up. More important, determine the sustainability of the proposed non-profit among the community. Who will fund it? Is there enough interest and money in the community to support the organization on an ongoing basis? Research corporate and government funding opportunities that are good matches with the mission of the organization and visit with local, private foundations in order to introduce the idea of a start-up non-profit, gauge their interest, and get to know them.

Determine the type of tax exempt status needed. Perhaps the most widely known, the 501(c)3 non-profit is an IRS tax code that permits certain tax exemptions to charitable, educational, scientific, religious, etc. organizations. Other tax exempt codes have been established for civic leagues, child care and social welfare organizations; for example, that have varying disclosure requirements and contribution allowances. Currently, I count 34 different IRS tax exempt codes!

Establish by-laws. The by-laws of a non-profit define how the organization will function and conduct its business in the community and typically address issues like board governance, terms of service and lines of authority within the organization. Consultation with legal counsel – or at least review of the by-laws – is highly recommended at this stage of the process.

Select a board of directors. What does this particular non-profit need in terms of the community representation on the board of directors? In general, organizations usually need financial, legal and human resource experience. Additionally, people tend to gravitate to what they know best so it is typical; for example, to see organizations with an educational purpose with teachers and school district administrators on the board. Make it a goal to diversify the board of directors as much as possible. While there is obvious value in keeping similar people together, diversification in the board increases the richness of experience and expertise that a board of directors can provide to a non-profit.

Develop strategic and fundraising goals. The management and board of start-up non-profit organizations are strongly encouraged to engage in some level of strategic and fundraising planning. How will the organization be funded? Where do management and board members expect the organization to be financially and programmatically in a year? In three years? In five years? A strategic plan is even more important to start-up non-profits especially because in the absence of a proven, successful track record of results it is one of the key items to be shared with potential funders to demonstrate that the organization has been formed with forethought, expertise and a business plan.

Request tax exempt status from the IRS. This is really the “big kahuna” in forming a non-profit organization. An organization is not considered not-for-profit until the IRS deems it so with a “Letter of Determination” (see bullet above about types of tax exemption). Without it, an organization may not legitimately solicit funds as a non-profit and donors can not make tax deductible contributions.

File state articles of incorporation. Typically granted from a Department of State, incorporation refers to the absorption of state law under the specific protections of the U.S. Constitution. That is, the U.S. Constitution shall override all state constitutions and state laws. For organizations that plan to incorporate, this is a key step that may occur in conjunction with filing for tax exempt status with the IRS.

Establish record keeping and financial accounting systems. Establishing board approved, financial and internal management procedures and protocols early in the game; for example, financial statements and reports as well as board meeting minutes, is advisable. Who will be responsible for maintaining records and financial accounting?

Obtain liability insurance. Like any other business, non-profit organizations are susceptible to legal risks and start-up organizations are advised to obtain liability insurances. Again, consultation with an attorney familiar with non-profit organizations can be very valuable in selecting Directors’ and Officers’ liability insurance as well as general professional liability coverage.

The bulleted items above are only some of the issues that need to be addressed by a start-up non-profit organization. Depending on the organization, additional items that may need to be addressed at start-up include: personnel policies, unemployment compensation, withholding taxes for the IRS, filing for state sales tax exemption status, and registering with state Bureaus of Charitable Organizations.

References

The National Center for Charitable Statistics at The Urban Institute; Quick Facts About Nonprofits, Custom Report Builder (2013). Retrieved from:

The sustainability of many non-profit organizations today largely depends on their abilities to manage their finances effectively and often in new ways. According to the 2013 State of the Nonprofit Sector Survey Results (Nonprofit Finance Fund, 2013), organizations that are successfully weathering the economic storm are changing their business models – among other strategies – in order to achieve increased fiscal stability in an unstable economy.

A review of the current literature in the field yields the following salient points in non-profit organization financial management :

Plan to increase cash reserves

According to the Nonprofit Finance Fund survey (2013), twenty-four percent of the participating organizations had only one month or no cash reserves on hand. Thirty-two percent of the organizations had two to three months of expenses in cash. Increasing cash reserves needs to be planned and a part of the overall financial projection for the year rather than happenstance that a surplus will be realized at the end of the year. The lower the cash reserve, the greater the greater the difficulty in meeting expenses during periods of low revenue or when revenue is delayed (e.g., grant awards, contract payments).

Financial planning is a team process

Many non-profits typically use a single-handed approach to preparing the annual budget. Effective financial planning for the next year’s annual budget and beyond requires every level of the organization; for example, program managers, development staff, human resources, the finance department as well as individual board members and committees. These individuals have hands-on experience or oversight perspectives about actual revenues and expenses that may be overlooked by just one or two people.

Communicate financial needs clearly and often

All too often the financial needs of an organization are discussed primarily among the upper levels of management. In fact, the Nonprofit Finance Fund survey (2013) cites that many non-profit organizations are uncomfortable discussing their financial needs with funders: only 24 percent of participating organizations would discuss their working capital needs, 16 percent would discuss cash flow problems, and 5 percent their debt problems. In the current economic climate, non-profit organizations need to communicate their financial needs clearly and often across all levels of the organization and with other key stakeholders. Once again, in a team process, communicating this financial information to other staff in the organization in terms that are clear to them increases their ability to act on it directly in their positions.

Utilize program-specific financial reports

The usual practice of non-profit managers and boards is to use budget-to-actual financial reports to gauge the fiscal health of the organization. That is, the annual budget is a road map against which monthly financial reports are compared to determine how “on course” the organization is to realizing its annual budget. In actuality, much of the research indicates that many non-profit organizations do not have a clear understanding of how much their specific programs are costing them (Barr and Bell, 2013; Kotloff and Burd, 2012). Utilizing program-specific analysis goes beyond the current fiscal year and is part of the overall future financial planning.

Invest in realistic administrative capacity

For many years, non-profit organizations have worked very hard to minimize their actual administrative costs. Likewise, foundations and contractors typically want to fund programs and services to the community rather than administrative overhead. However, those administrative costs are veryreal and lack of investment in this area often leads to gaps in a non-profit’s capacity to perform efficiently and effectively. According to the Nonprofit Finance Fund survey (2013), 69 percent of the participating organizations reported not having enough staff or time for data collection, 40 percent reported not having the correct staff expertise, and 26 percent did not have the necessary technology. Clearly, the old “let’s-cut-as-much-administrative-cost-as-possible” mentality is not working for many organizations across the United States. Adequate investment in a non-profit organization’s administrative capacity – in particular, finance expertise and technology – is an issue that demands honest dialogue between organizations and their funding sources.

Determine the need for diversification of revenue

Once considered a key element of financial sustainability, diversification of revenue largely depends on non-profit business models and the type of service the organization provides. Diversification of revenues has some inherent risks in that more streams of income does not necessarily mean greater surpluses at the end of the year. In order to attract new revenue streams, a non-profit needs to develop and sustain new programs or capacities. The reliability and competitiveness of the organization’s revenue streams dictate the degree of diversification that it needs (Barr and Bell, 2013).

Collaborate with a broad spectrum of public and private funding

Today’s non-profit organizations need to consider a broad array of collaborations and partnerships with other non-profit organizations (merger) to increase the delivery of services available to meet increasing demands from constituents as well as with for-profit businesses (social enterprise) in order to gain new sources of revenue and build their marketing brands as well as increase their financial sustainability.